The Significance of Japan's Bond Buying Program

On April 4, 2013, Japan announced one of its boldest quantitative easing programs in history. The Japanese central bank said it would buy $530 billion of Japanese government bonds per annum, which is $44 billion per month. This amount is comparable to the $45 billion the Federal Reserve is printing to buy U.S. longer-term treasuries. But if you compare this amount to the balance sheet and the GDP of both countries, we get a different picture.

The U.S. currently has a balance sheet of $3.2 trillion while the Japanese central bank has a balance sheet of $1.8 trillion, which is half the Federal Reserve balance sheet. U.S. GDP is at $16 trillion, while Japanese GDP is at $6 trillion, which is less than half the U.S. GDP. Still, Japan is buying an equal amount of domestic government bonds at ultra-low yields of 0.45% on the 10 year Japanese government bonds (Chart 1).

Chart 1: Japanese 10 Year Treasury Yield

I cannot stress enough how important this new Japanese program is to the precious metals market, bond market and currency markets, as these are not insignificant numbers. In a previous post I pointed out that Japan had a very dire fiscal situation with record budget deficits, interest payments and a large deficit to outlay ratio. Well, the numbers have gotten worse according to the latest report of the ministry of finance of Japan.

To get into the abysmal numbers, go here.